Value Trap In The For-Profit Education Industry
The Dynamic Wealth Report
January 11, 2011
by Corey Williams, Editor
When a former high flying stock has its price slashed, there’s always the
temptation to buy. The stock simply looks too cheap to pass up.
But beware the value trap…
Just because a stock has already seen a steep decline doesn’t mean it
can’t continue to fall. And if you’re only looking at the stock’s price
and earnings, you could be fooled into falling for a value trap.
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Right now there’s an entire industry that looks extremely cheap on the
surface. But in reality, it’s a bottomless pit that’s camouflaged with a
few sticks and leafs. It’s a value trap just waiting to snare
unsuspecting investors looking for cheap stocks.
Fortunately, you’re going to be one of the lucky investors sidestepping
disaster.
Let me explain…
The for-profit education industry is in deep trouble. Companies like
Apollo Group (APOL), Strayer Education (STRA), and
Corinthian Colleges
(COCO) have long been darlings of institutional investors.
And for good reason. Back in their hay day, they were great growth
stocks.
But over the last year, they’ve all been taken out to the woodshed. APOL
is down more than 40%, STRA is down more than 45%, and COCO is down 66%!
Whatever you do, don’t give into the temptation to buy these stocks
because they’re cheap. Simply put, these stocks are destined for the
trash heap. And you don’t want to own them at any price.
Remember, for-profit education stocks soared because the industry had
huge profit margins and it was growing at a phenomenal pace.
Their growth was fueled by aggressive and misleading sales tactics. And
easy access to federal student loans and grants.
The problem is many students who signed up for classes failed to
complete the program. Or promises of big earnings didn’t pan out when
they completed the program.
As a result, many of the students began to default on their federally
backed student loans. This caught the attention of lawmakers in
Washington, DC earlier this year. Apparently wasting taxpayer money is
ok for Congress but it’s frowned upon when others do it…
Now a whole slew of regulations are coming down on the for-profit
education industry. And it’s completely derailed the growth that made
the industry such a hot investment to begin with.
In fact, industry bellwether APOL just reported their most recent
quarterly results. The results are dismal. The number of new students
signing up for classes declined 42% from a year ago.
As of right now, I still haven’t seen a plan for them to start growing
again. And the truth is, I just don’t see how they ever will again.
Here’s where it gets tricky…
Thanks to deep cost cutting, APOL managed to beat analysts’ earnings
estimates. This has given investors hope management will be able to
right the ship.
Don’t believe the hype. For-profit education stocks are a value trap.
The writing is on the wall… New student enrollments are down 42% at the
best run for-profit education company. The others will likely fare much
worse. Save your money… Avoid this industry. And sidestep this value
trap!
The gears of the 2011 IPO market are beginning to turn. One of the
year’s first offerings will be consumer tracking firm Nielsen. The
private equity-backed IPO is looking to raise as much as $1.7 billion.
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